TPP212: How worried should you be about interest rates?

Our listeners often inspire the content for the podcasts and this week it was Alastair that raised the subject of this week’s podcast. Submitted as a question for ‘Ask Rob & Rob’, Alistair quite rightly noted there was probably a big enough talking point in this one, to make a full Property Podcast episode, so we did.

But what’s been happening with The Robs this week? Rob D is putting the finishing touches to his new book which will be out on April 26th, we’re all excited about this one as it is definitely needed.

In April 2009 they fell to 0.5% and stayed there until a further cut to 0.25% last year

Why are rates so low?

To promote consumer demand. You’re more likely to spend money if you get little return on saving it

To boost asset prices, which increases willingness to spend

To make it cheaper for companies to invest in growing

If we’re being cynical, to make it cheaper for the government to service its own debts!

How people misunderstand interest rates

An increase in your mortgage from 2% to 3% doesn’t sound like much, but it’s a 50% increase

If you borrow £200k at 2%, your monthly interest payment is £334

When it increases to 3%, the payment goes up to £500

This is what Alastair was referring to. It’s easy to make investments work when the finance is so cheap. But when it’s not so cheap, it’ll be much harder for investments to stack up

The PRA rules will help for new investments because they get stress tested at 5.5% anyway

Investors who’ve been on trackers since pre-crash and Owner-occupiers could find themselves in big trouble

What happens if rates go back to double-digits?

Unlikely because rates are set by BOE now

Also, rates tend to rise to combat inflation. Inflation is the result of more demand than supply (roughly speaking), and we seem to be moving into an era of low demand demographically

There’s been huge asset price inflation as a result of QE and low rates (hence demand for assets), but this hasn’t filtered down into the real world and seems unlikely to do so

So there seems little prospect of rates getting really high. But they will go up from where they are now…

So how worried should we prepare for rates rising?

Rises will be mitigated by banks lending at more competitive rates. With rates as low as they are now, they’re making more margin than they used to

Stress-test up to at least 5% – you have to if you’re borrowing anyway

If you’re sitting on properties that only cashflow because you’re on a very low rate, make plans to deal with that before rates rise again

Conclusion

Rates will rise from where they are, even if they don’t get up to double digits – and even when they were that high, it wasn’t for very long

It will be harder to make investments add up so finding and adding value will be more important than ever

Don’t kid yourself that this is normal! Plan for rates to be higher, then enjoy them while they’re so low

News story: Warren Buffet is also a shrewd property investor

Billionaire Warren Buffet may not be known for his property investments but unsurprisingly he hasn’t ignored property all together. He is well known for his long term approach to investment generally, and he’s applied that same way of thinking to this property investment which has done amazingly well for him.

Resource of the week

“Back Again?” is a Chrome extension that tracks how many times you’ve visited a page each day.